Understanding notice – employment contracts

If an employment contract is brought to an end, there is usually an obligation on the instigating party to give notice. How much notice will depend not only on the employment contract but also on statute, specifically, sections 86 to 91 of the Employment Rights Act 1996. In this article we look at the legal aspects of giving notice to end employment contracts and answer some common questions.

How much notice?

The Employment Rights Act 1996 requires employers to give employees a minimum amount of notice;

Employees with at least one month’s service are entitled to one week’s notice. Employees who have completed 2 years’ service are entitled to 2 weeks’ notice. Thereafter, employees are entitled to an additional week’s notice for every year of service that they have completed up to a maximum of 12 weeks’ notice (once the employee has 12 years’ service).

This entitlement is the minimum that employees must receive. Employment contracts can stipulate longer notice periods, but not shorter. Often employers will provide for a short notice period of perhaps just one week during the probationary period, increasing to one month once probation is successfully completed. Senior employees may enjoy notice periods of 3 months or sometimes longer.

When does employment end?

The date on which employment ends can be very important, not only in terms of ensuring that employees are paid correctly but also for determining the time limits for bringing an employment tribunal claim. Employment tribunals use the Effective Date of Termination (EDT) to work out the date on which an application must be received.

If an employee is given notice, their last day of employment will be the day on which their notice expires. If they are paid in lieu of notice (see below) then their last day of employment will be the last day on which they actually attended work, this will often be the day on which they are dismissed.

Can I pay in lieu of notice?

Contracts of employment may or may not contain a clause which permits payment in lieu of notice, often called a PILON clause. Whether or not such a clause exists will determine whether an employer can lawfully make a payment in lieu of notice, it can also have an effect on the tax treatment of the any notice payment made.

The Employment Rights Act 1996 does not make any provision to allow payment in lieu of notice and an employer who does so without an express PILON clause will breach the contract. The effect is that the Employee will no longer be bound by their contractual obligations; in particular, any post-termination restrictions that may have otherwise curtailed their future activities. Where there are no such restrictions in place, employers do sometimes decide to dismiss without notice knowing that the employee will have suffered no additional recoverable loss if a payment is made in lieu of notice.

Where the contract of employment contains a PILON clause, the PILON payment will be subject to income tax and national insurance. This may not be the case where there is no PILON clause, however, this can be a complex area of tax law and employers must take expert advice.

What are the exceptions?

If an employee commits an act of gross misconduct, they completely lose their right to notice. The employment contract will have been breached meaning that the employer is no longer bound by any notice provisions contained within it. The Employment Rights Act contains a provision that allows an exception to the entitlement to notice where employment is terminated by either party “by reason of the conduct” of the other party.

What if the employee is off work sick?

On first examination, the law in this area appears a little strange. An employee who is off sick is entitled to be paid for their notice period, even if they would not otherwise have been receiving pay by virtue of the fact that they are off sick. The exception is where an employee’s contractual notice is at least one week longer than statutory notice; in this case, the entitlement is lost. We understand that the explanation is that this provision was brought in many years ago as a way of encouraging employers to provide employees with longer periods of notice.

19 July 2016

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